Fed holds interest rates steady, predicts no increases this year
WASHINGTON — The Federal Reserve expressed increasing concern about slowing economic growth as it left interest rates unchanged Wednesday and showed little appetite for raising them in the near future.
The Fed’s fairly downbeat economic assessment is at odds with the White House’s rosy economic projections, which have continued to predict stronger growth than most other forecasters say is likely.
The Fed, in a statement at the conclusion of its two-day policy meeting, said “growth of economic activity has slowed from its solid rate in the fourth quarter” and cited slowdowns in household spending and business fixed investment.
Chairman Jerome Powell, speaking at a news conference after the meeting, said the Fed expects the economy to “grow at a solid pace” in 2019, but it will be slower than last year’s rapid acceleration. Powell said data arriving since December “suggest that growth is slowing somewhat more than expected.”
Fed officials now expect economic growth of 2.1 percent for 2019, down from the 2.3 percent forecast in December.
The White House insists growth will be much stronger: 3.2 percent this year and 3 percent next year. The gap between Fed expectations for annual growth and White House forecasts has never been wider in the decade since the recession ended.
After raising rates for five consecutive quarters, the Fed signaled that it sees no further need to raise them again in the near future. Forecasting data released at the end of the two-day meeting show the typical member of the Federal Open Market Committee now expects not to raise rates at all this year, an abrupt halt to what had been a steady march of rate increases to the current range of 2.25 to 2.5 percent. The typical member now expects a single rate increase in 2020 and none in 2021.
Powell did not rule out the possibility — based on the current condition of the economy — that the Fed’s next move could be a rate cut. “The data are not currently sending a signal that we need to move in one direction or another,” he said.
The Fed also revised down its expectations for headline inflation, which includes volatile commodities like oil and food, to 1.8 percent for the year. In December, the forecast was 1.9 percent.
Officials said they would end an effort to slim down the Fed’s massive holdings of government-backed securities in September, after slowing it down in May. The Fed accumulated $4.5 trillion worth of Treasury and mortgage-backed securities in an effort to stimulate the economy after the Great Recession. It has been slowly winnowing those holdings as the economy has recovered.
Driving the shift is officials’ mounting pessimism about the health of the US economy, which has seen slowing growth and weakened economic data so far this year, amid fading stimulus from President Trump’s signature 2017 tax cuts, headwinds from the administration’s trade war, and slowdowns in key trading partners, including Europe and China.
“Recent indicators,” officials wrote in their statement, “point to slower growth of household spending and business fixed investment in the first quarter.”
Powell said consumer spending and business investment has shown signs of weakness and said average monthly job growth, while strong, “appears to have stepped down somewhat from last year’s pace.”
Kevin Hassett, chairman of Trump’s Council of Economic Advisers, told reporters this week that he expects business investment growth to accelerate further this year as a result of the federal corporate income tax rate cut and other business incentives included in the 2017 law. He downplayed risks to growth. Administration officials have repeatedly said they are sticking with their forecast because their predictions for growth in 2017 and 2018 proved correct.
Powell has praised the strength of the economy, but stressed, in several public appearances, that officials are aware of the threats to global and domestic growth that have roiled financial markets since the end of last year. The Fed statement repeats what has become Powell’s go-to description of the Fed’s strategy for such a situation: patience.
Powell tried to reassure markets, saying “economical fundamentals are still strong.” But he said that the recent developments both domestically and abroad were providing a headwind to growth.
“We see a situation where the European economy has slowed substantially,” he said, adding that China’s economy has also weakened.